What Does the Term Bankruptcy Mean?

We often hear the phrase "Someone or some company has declared bankruptcy". However, many of us do not exactly understand what this means. You may have asked yourself "What does the term bankruptcy mean?".

Bankruptcy is a financial status that someone can find themselves in if they collect too much debt. If debts get too high, then a person or a company can bankruptcy in order to "clean the slate" for themselves.

It eliminates almost all of the debts that you are carrying on your record. There are however some downsides to taking this route in your personal finances.

The first major stumbling block to declaring bankruptcy is that it wrecks your credit score. Your credit score is the figure that is used to show how well you have paid back your debts from the past and the ones in the present.

It is a three digit figure that allows lenders to get a good idea of what kind of borrower you are. The higher the score, the more trusted you are, and thus the better rates you will get. The term bankruptcy means that your credit score is going to take a hit.

Bankruptcy: What does it mean?

If you have to declare bankruptcy, then the credit bureaus (they track your score for you) are going to see this and downgrade your score. This means that you may not qualify for many of the things that you might have in the past. You may find that you are no longer able to get the great rates on loans that you used to.

The word bankruptcy means different things depending on what kind of bankruptcy you are filing. There are two kinds that individuals and corporations can file. The first one involves the bankrupt person/company reorganizing their money. They have their debts suspended until they are able to pay them back at a later date. The other form involves having those debts removed entirely.

When a corporation takes the latter form, the business seizes to exist. There is simply no way that they can continue to operate. Thus, they liquidate (sell off) their remaining assets and return any remaining money to stock and bond holders.

The term bankruptcy should mean a lot to you financially. If you are considering taking this option, then you should make sure that it is the right thing for you. Do not jump into this thinking that it is the easy way out. It can causes a lot of problems for your financial future.